Mon 30 Mar 2009
Can someone explain the relationship between GDP and the value of currency?
Posted by echan76 under Economics
matt asked:
I understand that currency valuation is very complicated and encompasses many factors such as trade deficit/surplus, debt, etc. However, can someone please explain the direct effect one has on the other?
I understand that currency valuation is very complicated and encompasses many factors such as trade deficit/surplus, debt, etc. However, can someone please explain the direct effect one has on the other?
if GDP gos down, the currency is likely to become less valuable too.
B/c currency worth is what you can buy with it. So if there is less stuff being made in the country (which is what lower GDP means), and amount of currency is circulation stays the same, every unit of currency is worth less.
Think of it this way. Both GDP and your currency’s value reflect the state of your economy.
When GDP goes up, that’s a good thing! It means your country is doing well. So your currency, reflecting this good news, would rise too.
Now the reverse is also true. When GDP falls, that’s a bad thing! Your country isn’t doing so well, and so your currency takes a hit.